Small company stocks can be volatile

Sunday

Nov 11, 2012 at 6:00 AM

A while back, I noticed that a certain small biotechnology company had gone up 10 percent per day for several days in a row. I knew nothing about the company, but I intended to buy it, hold it until the next day, and then sell on another dayís 10 percent gain. Nearly to the minute, once I placed my order, the stock began falling. I sold three weeks later for a 28 percent loss. Lesson learned. ó S.D., Salt Lake City

The Fool responds: As you noted, you were making decisions and allocating your money without even knowing much about the company. Thatís always a risky proposition. Many stocks, especially those of small companies, can be quite volatile, and the more you know about them, the better. Biotech companies, for example, might rise on rumors that a certain drug will soon receive FDA approval. But then if the drug is instead rejected, the stock will swoon.

Always know why youíre buying into a company, and aim to do so when itís undervalued. Then keep up with its progress.